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Effective in 2005, Florida statutes defined “sinkhole loss” to mean “structural damage to the building, including the foundation, caused by sinkhole activity,” and they left the all-important term “structural damage” undefined. Homeowner’s policies issued in the state employed that formulation until May 17, 2011, when Florida adopted a much narrower five-part definition of structural damage that applied to policies affording coverage for sinkhole loss, and many courts construing the 2005 language held that the term “structural damage” meant nothing more than “damage to the structure.” Several weeks ago in Hegel v. First Liberty Ins. Corp., 778 F.3d 1214 (11th Cir., Feb. 27, 2015), a unanimous Eleventh Circuit panel held: (1) that defining structural damage to mean any “damage to the structure” was “facially unreasonable” and “untenable;” and (2) that the term was properly understood to mean “damage that impairs the structural integrity of the building.” It also refused, however, to look to the narrow 2011 formulation when dealing with a policy and a loss that preceded its effective date.

The Hegels owned a home in Spring Hills, Florida, and they made an insurance claim after discovering damage to the walls and floors on March 1, 2011. Their homeowner’s carrier, First Liberty, denied the claim after its engineering expert concluded that the damage could be attributable to differential settlement and ordinary concrete shrinkage as opposed to sinkhole activity and that, in any case, it did not rise to the level of structural damage as defined in the 2011 statute. The Hegels then secured several engineers of their own, who concluded that the home had suffered “widespread minor cracking” as a result of sinkholes and recommended $145,775 in subsurface grouting and $20,743.17 in cosmetic damage repairs.

The contract of insurance employed the 2005 formulation and left the term structural damage undefined, and the Hegels filed suit. Cross-motions for summary judgment followed. To obtain expedited review, First Liberty stipulated that structural damage meant any damage to the structure, but it nonetheless argued that it was entitled to summary judgment, contending that the 2011 definition of structural damage governed. The Middle District of Florida granted the policyholders’ motion, and an appeal followed.

On February 27th, the Court of Appeals reversed. Judge Ronald Gilman’s opinion rejected the broad interpretation of the term structural damage that both parties had agreed to in the court below. As he explained:

[C]onstruing “structural damage” to mean simply any “damage to the structure” in the context of the insurance policy is facially unreasonable.

* * *

The district court awarded the Hegels damages for all subsurface and cosmetic repairs based on the parties’ stipulation that there was “physical damage to the Plaintiffs’ home.” Because “structural damage” is necessary for the Hegels to recover under the policy, the court must have equated “physical damage to Plaintiffs’ home” with “structural damage to the building.” Equating the two, however, essentially defines “structural damage” as “physical damage” – an untenable result. Such a construction would render the word “structural” meaningless because all property damage is physical, thereby violating a foundational rule of contract interpretation that every word must be given effect.

Instead, the panel looked to what it dubbed the “excellent analysis” in Gonzalez v. Liberty Mut. Fire Ins. Co., 981 F.Supp.2d 1219 (M.D.Fla. 2013), and it held that the phrase “structural damage to the building” means “damage that impairs the structural integrity of the building.”

The court explained that this interpretation drew support from the fact that prior to 2005, the Florida legislature had defined sinkhole loss to mean “actual physical damage to the property covered.” In 2005, that was changed to “structural damage to the building,” and the statute doing so recited that the legislature’s intent was “generally to reduce the number of sinkhole claims.” In Judge Gilman’s words, “[t]his statement strongly implies that ‘structural damage’ is different from – and more restrictive than – ‘actual physical damage.’ “

As noted above, however, the panel declined to incorporate the 2011 amendment’s definition of structural damage into the Hegels’ insurance policy. For those reasons, it remanded the case to the trial court for a determination of how much structural damage was actually due to sinkhole activity when the term was “properly defined.”

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